The Dow line holds, just barely

Commentary: But Russell, others fear reconfirmation of bear market

By

PeterBrimelow

NEW YORK (MarketWatch) -- The line held, just. But its defenders are close to despair.

Dow Theory Letters' Richard Russell summed up the situation on Wednesday morning: "If the Dow Jones Industrial Average
DJIA, -1.35%
at today's close is below 7,552.29 (it's below that level as I write) we will have a Dow Theory reconfirmation of the primary bear market.

"I'm going to stick with orthodox Dow Theory, no excuses, no variations -- no "ifs" and "buts." IF the Industrial Average closes below 7,552.29 today the scales [Russell's log for indecision] will be removed from this site and I'll make this call -- the primary trend of the market has been reconfirmed as bearish under Dow Theory. In that case, my advice will be as follows -- my subscribers should be in (1) gold coins or Spdr Gold Trust
GLD, +0.22%
Central GoldTrust
GTU
Central Fund of Canada Limited
CEF, +0.61%
or (2) cash or T-bills, (3) small positions in Market Vectors Etf Tr
GDX, +0.37%
or gold shares are OK."

After the Dow held, closing at 7,556, Russell wrote grudgingly: "If the Fed was ever motivated to manipulate, this would be the perfect time ... I continue to believe the path of least resistance is down. Another day passes with the bear held at bay.

"Question -- Do I think manipulation is going on? As far as the Fed is concerned, this is economic war. 'All's fair in love and war.'"

This is an interesting departure for Russell. He usually brushes off the elaborate manipulation theories that have been developed by other letters over the last several years.

Dennis Slothower's Stealth Stocks Daily was one of the few letters to make money during the Crash of 2008.

Wednesday night he wrote: "The two key indexes that we need to watch closely now are the S&P 500 and the Wilshire 5000 indexes, both being broader market indexes. What we want to watch is the S&P 500 November lows at 741 and the Wilshire 5000 at 7,340. Today the S&P 500 closed at 788 and the Wilshire 5000 at 7,988. See Dec. 4 column

"Inter-market analysis doesn't bode well that these indexes will hold. As energy and the financial sectors are huge components of the S&P 500, a plunge in crude-oil prices will certainly make it difficult for energy stocks to hold above the November lows ... This certainly argues for caution as the stock market tests not only the November lows but perhaps the 2002 lows as well."

Not that those are far off. The Dow reached 7,286 on Oct. 9, 2002.

Slothower does poke disconsolately at a few optimistic arguments, such as the spring seasonal tendency to stock market strength.

But he concludes: "My advice for investors is to stay on the sidelines, protecting capital as the market proves whether the lows can hold or not. "

Another letter that made money in the Crash of 2008 is Peter Eliades' Stock Market Cycles. See Dec. 17 column

Eliades has actually been experimenting with bullishness. His stock index futures traders are long the March e-contract. But after Wednesday's woes, he wrote: "Based on today's action, we are compelled to say that the market is hanging onto a bullish case by its fingernails. The support line we have drawn on the S&P from the October lows of last year through all the subsequent lows but ignoring the November low was severely tested today ... today's lows came right down to that trendline. At this point, however, it would seem as though there is precious little more room to manipulate the line. We judge, therefore, that the S&P 500 e-mini contract is at the end of its line and any lows greater than 5-10 S&P points below today's lows would have to be judged as breaking the support line."

One bright note: Eliades did very well in January, a month otherwise dominated by rebounding hard-money services. See Feb. 4 column

His Stock Market Cycles was up 11.1% according to the Hulbert Financial Digest, vs. negative 8.14% for the dividend-reinvested Dow Jones Wilshire 5000.

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